Starbucks Corporation: Financial Research & Investment Analysis
This financial research report evaluates Starbucks Corporation (SBUX) as a potential investment opportunity. The paper examines the rationale for investing in Starbucks, including its strong leadership, global brand value, aggressive growth and expansion strategy, market dominance, delivery service initiatives, and menu diversification. It profiles the type of investor best suited to SBUX stock — an aggressive, long-term growth investor — and conducts a ratio analysis covering current ratio, quick ratio, earnings per share, price-earnings ratio, and return on equity using three years of annual report data. The report also applies stock correlation analysis, beta estimation, and the Capital Asset Pricing Model (CAPM) to evaluate expected returns, concluding with a recommendation that SBUX is a strong long-term investment.
- Introduction: Starbucks Corporation as an Investment: Overview of Starbucks as the chosen investment
- Rationale for Investing in Starbucks Corporation: Leadership, brand, growth, and diversification arguments
- Investor Profile for SBUX Stock: Aggressive long-term growth investor profile
- Financial Ratio Analysis: Current ratio, quick ratio, EPS, P/E, and ROE
- Stock Price Analysis and Valuation: Correlation, beta, and CAPM expected return
- Recommendations: SBUX recommended for long-term aggressive investors
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What makes this paper effective
- Integrates qualitative investment rationale (leadership, brand, expansion) with quantitative financial analysis (ratios, beta, CAPM), giving the report a well-rounded analytical structure.
- Uses a three-year historical window for ratio calculations, enabling trend analysis rather than snapshot judgments — a hallmark of sound financial reporting.
- Explicitly links the investor profile section to the stock's risk and growth characteristics, demonstrating awareness of portfolio suitability beyond raw performance metrics.
- Presents stock correlation data against three named competitors, grounding valuation in a competitive market context.
Key academic technique demonstrated
The paper demonstrates applied financial modeling, specifically the Capital Asset Pricing Model (CAPM). The student works through the beta calculation from first principles, then substitutes the result into the CAPM formula to derive an estimated expected return. This step-by-step quantitative derivation — with clearly labeled variables and intermediate computations — is the defining technical skill in undergraduate finance coursework.
Structure breakdown
The report follows a standard financial research structure: (1) company overview and investment rationale organized by named strategic factors; (2) investor profile suitability; (3) ratio analysis using three years of published financial data; (4) stock price and valuation analysis including correlation, beta, and CAPM; and (5) a final recommendation. Each section builds on the previous, moving from qualitative reasoning to quantitative evidence before arriving at a conclusion.
Introduction: Starbucks Corporation as an Investment
The company selected and considered as an investment opportunity is Starbucks Corporation. Starbucks was established in 1971 and operates out of the United States. The company is renowned as one of the largest roasters, vendors, and sellers of specialty coffee across the globe. It offers a variety of consumer products including coffee, tea, ready-made beverages, and ice cream. Beyond its focal Starbucks brand, the corporation also carries out marketing operations through other brands such as Tazo, Teavana, Evolution Fresh, Seattle's Best Coffee, and several others. Starbucks Corporation has business operations in over sixty-five countries across Europe, Africa, the Americas, the Middle East, and the Asia-Pacific region. Starbucks Corporation is publicly listed on the NASDAQ under the ticker symbol SBUX.
Rationale for Investing in Starbucks Corporation
There are a number of reasons why Starbucks Corporation is being considered as a potential investment. Over the past fiscal year, the stock of Starbucks (SBUX) increased by more than fifty percent — a figure that compares favorably to the two percent decline recorded by the S&P 500 over the same period. Moreover, at a time of great uncertainty, declining commodity prices, and a slow-moving market, the company's stock was one of the few large-cap winners over the preceding twelve months. This remarkable performance is not a recent anomaly; the stock of Starbucks Corporation rose more than 300% over the past five years, compared to a mere 70% gain by the S&P 500. The following subsections outline the key rationales for investing in Starbucks Corporation.
Great Leadership
Examining some of the most successful businesses of recent decades, one consistent factor is great leadership. Chairman and Chief Executive Officer Howard Schultz fits squarely into that category. Since taking over the company in 1986, Schultz demonstrated hunger, aspiration, determination, pioneering thinking, and drive — qualities that persist even today (Thalman, 2015). Whether navigating constructive or adversarial circumstances, Schultz knows how to use his position to influence change beyond the corporation itself. He writes op-ed articles on political topics and encourages his personnel to discuss current events and remain empathetic during periods of market instability. Schultz is the sort of leader who transforms average companies into extraordinary ones, as he has demonstrably done with Starbucks (Thalman, 2015).
Brand Name
Starbucks is ranked among the top 500 largest companies in the world. In the preceding year, Forbes ranked Starbucks Corporation 52nd among the most valuable brands globally. Furthermore, the company's brand valuation exceeded $11.1 billion in the current year, a significant increase from $9.9 billion the previous year (Thalman, 2015). It is important for prospective SBUX stock investors to recognize that Starbucks consumers are deeply loyal — a loyalty rooted in the brand's consistent quality. Building a strong brand is not a simple undertaking, which means Starbucks holds a meaningful competitive edge over its rivals, particularly at a time when fast-food chains are viewed negatively by many consumers. For example, one of its primary rivals, Dunkin' Donuts, continues to lag behind Starbucks in industry rankings (Thalman, 2015).
Growth and Expansion
Despite being in operation for more than three decades, Starbucks Corporation continues to expand at a rapid pace. Toward the close of 2014, the company had business operations in more than 21,000 locations. Looking ahead, Starbucks Corporation intended to increase its total locations to beyond 30,000 within five years (Thalman, 2015). The company was also revamping existing drive-through windows and planning new product offerings such as alcohol as part of the Starbucks Evening experience. Management expressed confidence that these changes would help grow company revenue from approximately $19 billion to over $30 billion over the five-year plan period (Thalman, 2015). According to Riley (2015), growth and expansion in China and the broader Asia-Pacific region positioned Starbucks for further gains, with plans to more than double its store count in China to over 3,000 locations by 2019. Starbucks Japan was also expected to continue growing and generating sales that would boost the company's stock performance.
Market Dominance
Starbucks is perhaps the most recognized name in the global coffee market. Through supply partnerships with Pepsi-Cola and other major suppliers, the company operates alongside top names in the beverage industry. Starbucks Corporation's international presence is remarkable — the business has come a long way from its origins as a local Seattle coffee shop (Zacks, 2015). The company has also acquired local chain brands such as Seattle's Best Coffee. Another key rationale for investment is that Starbucks operates well beyond the coffee category. It has strategically entered other growing market segments that might otherwise have threatened or eroded its profits (Zacks, 2015). For instance, Starbucks Corporation owns both Tazo Tea and Teavana. The tea market in the United States was projected to double within five years by 2020, and Teavana's supply chain encompassed more than 300 stores across malls and supermarkets nationwide. Tazo Tea was also supplied in every Starbucks store and drive-through location. This positions Starbucks Corporation with a strong and growing presence in a market expected to continue expanding (Zacks, 2015).
Starbucks Corporation Delivery Service
According to Rider (2015), a highly anticipated SBUX delivery service was set to launch in select urban areas, with the potential to increase sales and revenue significantly. Members of the Starbucks loyalty program would benefit from having their orders delivered directly to their workplaces or desks (Rider, 2015). This planned operation formed part of the company's broader growth strategy, which emphasized emerging technology as a means of interacting with consumers in new ways. For example, the company had already integrated mobile payments into its operations. At the time, Starbucks' mobile-payments application was processing approximately seven million transactions per week. The planned introduction of a delivery service was expected to generate additional revenue on top of these existing digital channels (Rider, 2015).
Diversification of Menu Items
Starbucks Corporation has made significant progress in diversifying its product offerings beyond coffee. According to Rider (2015), the company anticipated an additional $2 billion in revenue from tea as part of its five-year growth plan. The partnership with La Boulange — a bakery known for its artisanal pastries — also drove food sales higher, resulting in 2% growth in same-store sales across four consecutive financial quarters (Rider, 2015). With a goal to double food sales by 2019, the company's stock stood to benefit substantially from its diversified product portfolio. Additionally, the eventual introduction of alcohol into select locations as part of the Starbucks Evening experience was projected to generate approximately $1 billion in additional revenue (Rider, 2015).
Significant Growth
Starbucks Corporation has demonstrated consistent and substantial growth in recent years. Over the preceding months in 2015, the company's share price rose from $34 to over $61. Earnings for the current financial quarter were anticipated to grow more than 20% on a year-over-year basis. The company was also projecting a 16.54% growth in revenue — roughly double the industry average (Zacks, 2015). This current growth reflects a longer pattern: the corporation's historic annual EPS growth stood at 19.95%, more than twice the S&P 500 average. In many respects, this trajectory represents Starbucks Corporation's transformation into a truly global enterprise.
Investor Profile for SBUX Stock
Understanding the profile of an investor is one of the most important considerations in building an effective portfolio. Investor profiles range from highly conservative to highly aggressive. The profile of a prospective Starbucks stock investor is an aggressive one — that is, an investor seeking capital appreciation over the long term through equity investments. In the long run, growth assets have historically delivered returns greater than those available from cash equivalents or fixed-income investments. Over the short term, however, growth investments are subject to volatility, meaning their value may fluctuate frequently and could at times fall below the initial purchase price.
The ideal SBUX investor is comfortable with this volatility. He or she is prepared to endure temporary fluctuations with confidence that the portfolio will increase in value over time (CIBC, 2015). This tolerance is well founded given Starbucks Corporation's current trajectory. While there is always some risk that strong performance may plateau, the company is simultaneously making long-term investments — expanding into China and the Asia-Pacific region, launching the Starbucks Evening experience, and diversifying its menu — which provide a compelling basis for sustained long-term growth.
Financial Ratio Analysis
Financial ratio analysis enables a prospective investor to assess the financial health of a company. Financial statements provide a limited picture of company performance in isolation; ratios provide the analytical framework needed to interpret those statements meaningfully and to compare performance against competitors and industry benchmarks (Tracy, 2012). The following ratios are calculated from Starbucks Corporation's published annual reports for the three fiscal years 2012, 2013, and 2014.
Current Ratio
The current ratio is a liquidity measure indicating whether a company has sufficient short-term assets to cover its short-term liabilities. It is calculated by dividing total current assets by total current liabilities. The following table presents Starbucks Corporation's current ratio over the three-year period.
| 2014 | 2013 | 2012 | |
|---|---|---|---|
| Total Current Assets | 4,168,700 | 5,471,400 | 4,199,600 |
| Total Current Liabilities | 3,038,700 | 5,377,300 | 2,209,800 |
| Current Ratio | 1.37 | 1.02 | 1.90 |
The current ratio of Starbucks Corporation fluctuated over the three-year period. It declined from 1.90 in 2012 to 1.02 in 2013, then recovered to 1.37 in 2014 — though it did not return to the 2012 level. The ideal current ratio benchmark is 2:1. Although Starbucks Corporation has not reached this benchmark, its current ratio consistently above 1.0 indicates that the company is able to meet its short-term debt obligations while retaining funds to distribute to stakeholders.
Quick Ratio
The quick ratio — also known as the acid test ratio — is another liquidity measure. It is similar to the current ratio but excludes inventories from current assets, providing a more conservative assessment of short-term liquidity. The following table presents Starbucks Corporation's quick ratio over the three-year period.
| 2014 | 2013 | 2012 | |
|---|---|---|---|
| Total Current Assets | 4,168,700 | 5,471,400 | 4,199,600 |
| Inventories | 1,090,900 | 1,111,200 | 1,241,500 |
| Current Assets Excluding Inventories | 3,077,800 | 4,360,200 | 2,958,100 |
| Total Current Liabilities | 3,038,700 | 5,377,300 | 2,209,800 |
| Quick Ratio | 1.01 | 0.81 | 1.34 |
Like the current ratio, the quick ratio varied over the accounting period. It declined sharply from 1.34 in 2012 to 0.81 in 2013, before recovering to 1.01 in 2014. The ideal quick ratio benchmark is 1:1. Across the three years, the company has generally been able to cover its short-term obligations without liquidating inventories — an indicator of sound financial management and profitability.
Earnings per Share
Earnings per share (EPS) indicates the portion of a company's profit allocated to each outstanding share of common stock. It represents the return each shareholder receives from the company's net income in a given fiscal year and serves as a key indicator of profitability. EPS is calculated as follows:
(Net Income − Dividends on Preferred Stock) / Outstanding Shares
| 2014 | 2013 | 2012 | |
|---|---|---|---|
| Net Income | 2,068,100 | 8,300 | 1,383,800 |
| Dividends on Preferred Stock | 0 | 0 | 0 |
| Income Attributable to Common Stock | 2,068,100 | 8,300 | 1,383,800 |
| Outstanding Shares | 1,484,200 | 1,484,200 | 1,484,200 |
| Earnings per Share | $1.39 | $0.01 | $0.93 |
EPS was inconsistent across the three-year period. It declined substantially from $0.93 in 2012 to $0.01 in 2013 before rising significantly to $1.39 in 2014. This means that each share of Starbucks Corporation earned a return of $1.39 in the most recent fiscal year — a strong signal of profitability and a positive indicator for prospective investors.
Price-Earnings Ratio
The price-earnings (P/E) ratio is a valuation metric that measures the current share price relative to earnings per share. It is calculated using the following formula:
Price-Earnings Ratio = Market Value per Share / Earnings per Share
With Starbucks Corporation's stock trading at $61.34 per share and an EPS of $1.39, the P/E ratio is calculated as follows:
Price-Earnings Ratio = $61.34 / $1.39 = $44.13
The price-earnings ratio of Starbucks Corporation is high, which indicates that investors expect significantly higher earnings growth in the future. This is consistent with the company's expansion plans and growth trajectory, and suggests that the stock represents a sound investment for a prospective investor.
Return on Equity
The return on equity (ROE) ratio measures profitability in relation to shareholders' equity. It indicates the return that shareholders obtain from the equity invested in the corporation relative to net income generated.
| 2014 | 2013 | 2012 | |
|---|---|---|---|
| Net Income | 2,068,100 | 8,300 | 1,383,800 |
| Total Equity | 5,272,000 | 4,480,200 | 5,109,000 |
| Return on Equity | 39.23% | 0.19% | 27.09% |
Return on equity declined sharply from 27.09% in 2012 to 0.19% in 2013, reflecting the significant decline in net income that year. In 2014, however, ROE recovered strongly to 39.23%, indicating that the company used its equity effectively and generated approximately 39 cents of return per dollar of equity invested in its operations. This is a positive signal regarding management effectiveness and overall company profitability.
References
Brigham, E., & Ehrhardt, M. (2008). Financial Management: Theory & Practice. Thomson South Western.
Brigham, E., & Ehrhardt, M. (2009). Corporate Finance: A Focused Approach. Thomson South Western.
CIBC. (2015). Your investor profile. Retrieved November 9, 2015, from https://www.cibc.com/ca/advice-centre/growing-your-wealth/investor-profile.html
Rider, A. (2015). 3 reasons Starbucks stock is a hot buy in 2015. NASDAQ. Retrieved November 9, 2015, from http://www.nasdaq.com/article/3-reasons-starbucks-stock-is-a-hot-buy-in-2015-cm444245
Thalman, M. (2015). Should you buy SBUX after its amazing one-year stock performance? InvestorPlace. Retrieved November 9, 2015, from http://investorplace.com/2015/09/starbucks-stock-sbux-mcd-dnkn/
Tracy, A. (2012). Ratio Analysis Fundamentals. Natural Selection Designs.
Zacks. (2015). 3 reasons to buy Starbucks. Zacks Research. Retrieved November 9, 2015, from http://www.zacks.com/stock/news/179980/3-reasons-to-buy-starbucks
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